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Trump’s Trade Policies: Impact on India and Global Trade Dynamics
Context:
A day after US President Donald Trump issued fresh tariff threats against India and other countries, the White House released a statement following his phone call with Indian Prime Minister Narendra Modi.
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- Trump reportedly emphasised the need for India to increase its procurement of American-made security equipment and move towards a more “fair” bilateral trading relationship.
Shift in US Trade Policy Under Trump
- Reciprocal Trade Policies: Trump’s administration is pushing for equal market access in both developed and developing nations.
- India’s Key Export Sectors at Risk: Pharmaceutical products, gems and jewellery, and marine products could face new tariffs under Trump’s second term.
- Past Tariff Actions: In his first term, Trump imposed high tariffs on Indian steel and aluminium exports.
- Potential Broad Tariff Increase: Reports indicate that US Treasury Secretary Scott Bessent is considering a 2.5% tariff on all imported goods.
- Trump’s Preference for Higher Tariffs: Trump has signaled that he wants a tariff rate higher than 2.5%.
- Impact on India: The US is India’s largest trading partner, with bilateral trade exceeding $117 billion in 2023.
- Any tariff hikes could significantly affect India’s exports.
Pharmaceutical Sector: India’s Biggest Vulnerability
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- India’s Trade Surplus with the US: The final goods category accounted for a $26.8 billion trade surplus in 2023.
- Pharmaceutical Sector at Risk: Pharmaceuticals formed 21.9% of India’s $20 billion final consumer goods exports to the US, making it the largest export segment.
- Other Key Export Categories:
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- Gems and Jewellery: 9.6% of final goods exports.
- Marine Products: 6.6% of final goods exports.
- Potential Trade Restrictions: A Research and Information System for Developing Countries (RIS) report suggests that the new US trade regime may impose restrictions on:
- Pharmaceuticals, fisheries, and jewellery.
- Chemical products, textiles, and wood pulp could also be affected.
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- Growing Dependence on the US Market:
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- India’s trade surplus with the US has doubled over the last decade.
- The US is India’s top export market, accounting for 17.73% of total exports.
- IT Sector Vulnerability: Over 70% of India’s IT export revenue comes from the US, making it susceptible to changes in US trade policies and H-1B visa norms.
| India’s pharmaceutical industry, known as the “Pharmacy of the World,” ranks third globally in volume and fourteenth in value, with a market valued at approximately $50 billion in 2023 and projected to reach $130 billion by 2030. The country exports pharmaceuticals to over 200 nations, supplying more than 50% of Africa’s generic medicine needs and around 40% of the U.S. generic demand, while also accounting for about 60% of global vaccine demand. |
Why is China a Bigger Tariff Target than India?
- India’s Contribution to US Trade Deficit: India contributes $33.2 billion (3.2%) to the US trade deficit. India ranks ninth in terms of impact on the US trade deficit.
- China’s Contribution to US Trade Deficit: China contributes significantly more, $317.7 billion (30.2%), making it the largest contributor to the trade deficit.
- US Tariff Targets: China, Mexico, and the European Union are more likely targets for US tariffs due to their higher contributions to the deficit.
- Impact of Chinese Imports on US Manufacturing: A 2017 NBER paper highlighted the link between increased Chinese imports (post-WTO accession in 2000) and the decline in American manufacturing jobs.
- Connection to 2016 Election: The decline in manufacturing jobs helped fuel support for Trump in key manufacturing states during the 2016 election.
Political Significance of Tariffs for Trump
- Voter Base: Tariffs have been a cornerstone of Trump’s political strategy, particularly appealing to his voter base in manufacturing-heavy states.
- In the 2016 election, Trump won 89 of the 100 counties most affected by Chinese import competition.
- The 2024 election results showed a similar trend—non-college-educated voters favored Trump (54%), while college graduates preferred his opponent.
- Trade War: During his first presidency, Trump launched a trade war against China, India, and other countries.
- However, despite imposing heavy tariffs, he failed to secure a favorable trade deal with China.
- The US-China trade agreement (2020), which required China to purchase $200 billion worth of US exports, saw China fulfilling only 58% of its commitments.
While India may avoid the harshest tariffs, it must diversify its export markets and strengthen bilateral trade negotiations to mitigate potential economic risks in the evolving US trade landscape.
